My VIP Tax Team VAT question of the week: Is there VAT on cross charges between companies?

The underlying issue at hand is whether the amount of money your client is requesting from, or paying to, another party is consideration for a supply of goods or services made by the recipient of the monies.

Section 4(1) of VAT Act 1994 states that VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

It is commonplace for a business to incur costs it believes should be ‘paid for’ by their customer, or by a related company, or by third party. Requesting payment may be made via the raising of an invoice and this can lead to the question ‘should there be VAT on this invoice?’.

A common area of confusion concerns the use of the term “disbursement”.

But what is a ‘disbursement’ and how does this differ from recharged expenses?

S25 of VAT Notice 700 (https://www.gov.uk/guidance/vat-guide-notice-700#section25) states:

You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met:

• you acted as the agent of your client when you paid the third party
• your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
• your client was responsible for paying the third party (examples include estate duty and Stamp Duty payable by your client on a contract to be made by the client)
• your client authorised you to make the payment on their behalf
• your client knew that the goods or services you paid for would be provided by a third party
• your outlay will be separately itemised when you invoice your client
• you recover only the exact amount which you paid to the third party
• the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account

All these conditions must be satisfied before you can treat a payment as a disbursement.

The Notice uses the example of a solicitor recharging postal search fees as a typical disbursement. Although even this area can be contentious with electronic and personal searches not qualifying as disbursements in HMRC’s view, as rather than merely the act of obtaining the information, the solicitor uses that information to provide advice to the client.

However a distinction should be made for recharged expenses which are often incorrectly treated as disbursements. Where someone is providing services to a customer and incurs costs in making those services, (e.g., travel to attend sites, meals, accommodation etc), they may request reimbursement of these expenses as part of their overall charge for performing the service.  In this case then the consideration for the supply of the services will be a monetary fee plus expenses incurred. The expenses are further consideration for the supply of the service, (the supplier has not provided meals and accommodation to the client) and such they form cost components of the consideration to be charged for the service. Output VAT will be due on the total consideration of fee plus expenses.

The costs incurred by the supplier would be input tax related to the supply of the service and reclaimable subject to the normal input tax rules.

Similarly, if a builder buys materials as part of a contract to supply and fit into a customer’s premises, whilst the materials may be destined to be ultimately ‘paid for by the customer’, the initial purchase is by the contractor who has contracted with the builders’ merchant to buy the materials. He has not acted as an agent of the customer in the purchase from the merchant.

When he charges the customer for the materials, even if he charges at cost, then he has supplied the materials as a principal and should charge the correct VAT rate applicable. He has ‘bought in and sold on’ the materials. He should account for output VAT on the sale and can reclaim input tax on the purchase (subject to the normal rules).

In the ‘cross charges’ scenario a company in a corporate structure (not a VAT Group) charges an associated company for costs incurred in arranging a meeting attended by all the associated companies. The requester intends to charge each attendee for ‘their share of the cost of the meeting’.

For the request to be a disbursement then the company requesting the monies would have to be acting as an agent for the attendees who received the service and were responsible for paying the supplier. Whilst the associated companies may have agreed to share the cost of the meeting amongst themselves, the supply was not to each of them individually. The organising company sourced the meeting with the venue provider who contracted with the organising company, not each attendee.

Whether the request for reimbursement constitutes a supply by the organising company to the attendees will rely on the economic reality of the circumstances. If they agreed to provide the meeting and refreshments etc and are charging each attendee for the provision of the meeting, then there will be a supply to each attendee and VAT will be applicable to the ‘recharge’. Related input tax incurred by the organising company could then be reclaimed (subject to the normal rules).

Situations in which the cross-charges would not be a supply would be if the venue provider had an agreement to contract separately with each company for its share or there was a multi-party contract, both of which are commercially unlikely.

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